The science of Managerial Economics has emerged only recently.

With the

growing variability and unpredictability of the business environment,

business managers have become increasingly concerned with finding

rational and ways of adjusting to an exploiting environmental change.

The problems of the business world attracted the attentions of the

academicians from 1950 onwards. Managerial economics as a subject

gained popularity in the USA after the publication of the book “Managerial

Economics” by Joel Dean in 1951.

Managerial economics generally refers to the integration of economic theory

with business practice. Economics provides tools managerial economics

applies these tools to the management of business. In simple terms,

managerial economics means the application of economic theory to the

problem of management. Managerial economics may be viewed as economics

applied to problem solving at the level of the firm.

It enables the business executive to assume and analyse things. Every firm

tries to get satisfactory profit even though economics emphasises

maximizing of profit. Hence, it becomes necessary to redesign economic

ideas to the practical world. This function is being done by managerial

economics.

Definition:

Managerial economists have defined managerial economics in a variety

of ways:
According to E.F. Brigham and J. L. Pappar, Managerial Economics is “the

application of economic theory and methodology to business administration

practice.”

To Christopher Savage and John R. Small: “Managerial Economics is

concerned with business efficiency”.

Milton H. Spencer and Lonis Siegelman define Managerial Economics as

“the integration of economic theory with business practice for the purpose of

facilitating decision making and forward planning by management.”

In the words of Me Nair and Meriam, “Managerial Economics consists of the

use of economic modes of thought to analyse business situations.”

D.C. Hague describes Managerial Economics as “a fundamental academic

subject which seeks to understand and analyse the problems of business

decision making

Scope of business Economics:

(i) Demand Analysis and Forecasting:
A firm is an economic organisation which transforms inputs
into output that is to be sold in a market. Accurate
estimation of demand, by analysing the forces acting on
demand of the product produced by the firm, forms the vital
issue in taking effective decision at the firm level.

A major part of managerial decision making depends on

accurate estimates of demand. When demand is estimated,
the manager does not stop at the stage of assessing the
current demand but estimates future demand as well. This
is what is meant by demand forecasting.

This forecast can also serve as a guide to management for

maintaining or strengthening market position and
enlarging profit. Demand analysis helps in identifying the
various factors influencing the demand for a firm’s product
and thus provides guidelines to manipulate demand. The
main topics covered are: Demand Determinants, Demand
Distinctions and Demand Forecasting.
(ii) Cost and Production Analysis:
Cost analysis is yet another function of managerial
economics. In decision making, cost estimates are very
essential. The factors causing variation in costs must be
recognised and allowed for if management is to arrive at
cost estimates which are significant for planning purposes.

The determinants of estimating costs, the relationship

between cost and output, the forecast of cost and profit are
very vital to a firm. An element of cost uncertainty exists
because all the factors determining costs are not always
known or controllable. Managerial economics touches these
aspects of cost analysis as an effective knowledge and the
application of which is corner stone for the success of a
firm.
Production analysis frequently proceeds in physical terms.
Inputs play a vital role in the economics of production. The
factors of production otherwise called inputs, may be
combined in a particular way to yield the maximum output.

Alternatively, when the price of inputs shoots up, a firm is

forced to work out a combination of inputs so as to ensure
that this combination becomes the least cost combination.
The main topics covered under cost and production analysis
are production function, least cost combination of factor
inputs, factor productiveness, returns to scale, cost concepts
and classification, cost-output relationship and linear
programming.
(iii) Inventory Management:
An inventory refers to a stock of raw materials which a firm
keeps. Now the problem is how much of the inventory is the
ideal stock. If it is high, capital is unproductively tied up. If
the level of inventory is low, production will be affected.

Therefore, managerial economics will use such methods as

Economic Order Quantity (EOQ) approach, ABC analysis
with a view to minimising the inventory cost. It also goes
deeper into such aspects as motives of holding inventory,
cost of holding inventory, inventory control, and main
methods of inventory control and management.
(iv) Advertising:
To produce a commodity is one thing and to market it is
another. Yet the message about the product should reach
the consumer before he thinks of buying it. Therefore,
advertising forms an integral part of decision making and
forward planning. Expenditure on advertising and related
types of promotional activities is called selling costs by
economists.

There are different methods for setting advertising budget:

Percentage of Sales Approach, All You can Afford Approach,
Competitive Parity Approach, Objective and Task Approach
and Return on Investment Approach.
(v) Pricing Decision, Policies and Practices:
Pricing is very important area of managerial economics. The
control functions of an enterprise are not only productions
but pricing as well. When pricing a commodity, the cost of
production has to be taken into account. Business decisions
are greatly influenced by pervading market structure and
the structure of markets that has been evolved by the nature
of competition existing in the market.

Pricing is actually guided by consideration of cost plan

pricing and the policies of public enterprises. The knowl-
edge of the pricing of a product under conditions of
oligopoly is also essential. The price system guides the
manager to take valid and profitable decision.
(vi) Profit Management:
A business firm is an organisation designed to make profits.
Profits are acid test of the individual firm’s performance. In
appraising a company, we must first understand how profit
arises. The concept of profit maximisation is very useful in
selecting the alternatives in making a decision at the firm
level.

Profit forecasting is an essential function of any

management. It relates to projection of future earnings and
involves the analysis of actual and expected behaviour of
firms, the sales volume, prices and competitor’s strategies,
etc. The main aspects covered under this area are the nature
and measurement of profit, and profit policies of special
significance to managerial decision making.

Managerial economics tries to find out the cause and effect

relationship by factual study and logical reasoning. For
example, the statement that profits are at a maximum when
marginal revenue is equal to marginal cost, a substantial
part of economic analysis of this deductive proposition
attempts to reach specific conclusions about what should be
done.
The logic of linear programming is deduction of
mathematical form. In fine, managerial economics is a
branch of normative economics that draws from descriptive
economics and from well established deductive patterns of
logic.
(vii) Capital Management:
Planning and control of capital expenditures is the basic
executive function. The managerial problem of planning
and control of capital is examined from an economic stand
point. The capital budgeting process takes different forms in
different industries.

It involves the equi-marginal principle. The objective is to

assure the most profitable use of funds, which means that
funds must not be applied when the managerial returns are
less than in other uses. The main topics dealt with are: Cost
of Capital, Rate of Return and Selection of Projects.

Thus we see that a firm has uncertainties to rock on with.

Therefore, we can conclude that the subject matter of
managerial economics consists of applying economic
principles and concepts towards adjusting with these
uncertainties of the firm.

In recent years, there is a trend towards integration of

managerial economics and Operation Research. Hence,
techniques such as linear Programming, Inventory Models,
Waiting Line Models, Bidding Models, Theory of Games,
etc. have also come to be regarded as part of managerial
economics.